Is Software Eating the World? ; Professor Yongseok SHIN (Washington University in St. Louis)

(written jointly with Sangmin Aum)

Abstract

The labor income share has fallen steadily since the 1980s in most advanced economies. The most widely accepted explanations of this phenomenon evolve around the substitution between capital and labor, but micro-level estimates more often than not show that capital and labor are complements. Using firm- and establishment-level data from Korea, we divide capital into equipment and software. Our estimated elasticities of substitution show that equipment and labor are complements (0.5), consistent with other micro-level estimates, but software and labor are substitutes (1.7), a novel finding that reconciles conflicting views on the elasticities in the literature. As the quality of software improves, the labor share falls within firms. In addition, production reallocates to those firms that use software more intensively, as they become relatively more productive. It turns out these firms tend to have low labor shares (an empirical question, since in theory software-intensive firms may have above-average labor shares and below-average equipment shares), and hence the reallocation further reduces the aggregate labor share. Software, not equipment capital, is the key to the decline of the labor income share.